Bloomberg News

Sweden a Crisis Casualty No More Shows How to Get Haven Glow (2)

After suffering through devaluations,
three years of economic contraction and a banking crisis in the
1990s, Sweden has learned how to handle financial turmoil.

Now, the largest Nordic economy is emerging as a permanent
haven from global market turbulence, according to the nation’s
debt office.

“Sweden is looked at in a different light than before,”
Thomas Olofsson, head of the Swedish government’s debt
management, said in an interview in Stockholm. “There’s
definitely a completely different interest in Sweden than five
to 10 years ago. In the past, the Swedish exchange rate and
interest rates often suffered during times of turbulence in a
way that we haven’t seen this time around.”

The country cemented its status as a haven from Europe’s
debt crisis last year, after posting the biggest economic
rebound in the European Union in 2010 while keeping its budgets
in surplus. Sweden boasts the lowest default risk in the world,
after oil-rich Norway, credit derivatives suggest, and has
managed to produce some of Europe’s best-capitalized banks.

The success in navigating way through the current crisis
follows lessons learned two decades ago. Swedes suffered three
years of economic decline from 1991 through 1993, culminating in
the 1992 currency crisis, when the Riksbank abandoned the krona
peg after failing to stem capital flight even with a 500 percent
interest rate.

Crisis Policies

After those experiences, Sweden put in place the fiscal and
regulatory framework to shield the economy from financial
instability. The measures proved robust enough to withstand even
the worst global economic crisis since the Great Depression.

Now, the krona is the second-best developed-world currency,
gaining 5.9 percent on a correlation-weighted basis over the
past 12 months. That’s second to only the New Zealand dollar in
a basket of 10 developed nations tracked by Bloomberg. Sweden’s
krona has gained about 36 percent against the euro and 41
percent against the dollar since March 2009.

“A big difference from the past is that the krona has been
so strong during this cycle of weak economic activity,” Jussi Hiljanen, head of fixed income research at SEB AB in Stockholm,
said by phone. “Typically, things haven’t been like that.”

Yields Tightening

The country’s 10-year government bond yields just over 40
basis points more than benchmark German notes, compared with an
average of 87 basis points over the past 23 years. At the height
of the debt crisis last year, Swedish 10-year yields even sank
as low as 22 basis points below bunds.

The difference in yield between benchmark Swedish 10-year
debt and similar-maturity German bunds narrowed three basis
points as of 9:11 a.m. local time to 42 basis points. Sweden’s
10-year yield eased two basis points to 1.67 percent. Two-year
yields also fell two basis points, narrowing the spread on that
maturity relative to bunds to 79 basis points from 82 basis
points at the end of last week.

Though spreads widened earlier this year amid confidence
euro-area policy makers will be able to contain the region’s
crisis, there are signs investors have started to view the move
as a buying opportunity.

“Investors probably think our bonds have become quite
cheap and that it’s attractive to buy them again,” Olofsson
said. “We’ve seen that interest from international investors
has returned. They’re very interested in our bond market, not
the least the government bond market because of its liquidity
and Sweden’s AAA rating.”

No Forecasts

Olofsson declined to give any prediction as to where
Swedish yields might move.

According to Hiljanen at SEB, “bond spreads still have the
potential to tighten further.”

Foreign investors increased their ownership of Swedish
public debt to 45 percent in February from 31 percent following
the collapse of Lehman Brothers Holdings Inc. at the end of
2008, according to SEB calculations. In July 2000, foreign
investors held only 16 percent of Swedish debt.

“They’re buying Swedish bonds not just because of our
sound public finances but also because it’s a different
currency” from dollars and euros, Olofsson said. “They have,
of course, seen that these types of concentrated assets come
with a risk that they haven’t taken into account before.”

Cutting Debt

Finance Minister Anders Borg has cut debt levels to below
40 percent of gross domestic product since taking office in 2006
and kept the budget close to balance throughout the financial
crisis. That has allowed Sweden to boost spending to foster
growth this year, as the austerity-mired euro area contracts for
a second year.

The EU last week estimated the Swedish economy, home to
Ericsson AB and Hennes & Mauritz AB (HMB), will grow 1.5 percent this
year and 2.5 percent next year. The 17-nation euro area will
shrink 0.4 percent this year, the European Commission said on
May 4.

Sweden’s AAA rated debt will reach 40.7 percent of GDP this
year, compared with 38.2 percent in 2012, the European
Commission said last week. That’s well within the European
Union’s 60 percent threshold and compares with an average of
95.5 percent in the euro area.

‘Remain Weak’

Sweden’s central bank last month said there is “still
considerable uncertainty” in the euro area where growth is
“expected to remain weak.” It signaled Sweden’s benchmark repo
rate will probably remain at 1 percent until the second half of
next year, before tightening can start. The European Central
Bank on May 2 cut its key rate to 0.5 percent to help pull the
euro area out of a recession.

“The Riksbank has a somewhat higher policy rate than the
ECB which together with better liquidity suggests that we will
have to sell our bonds at a higher rate than Germany,” Olofsson
said. “We have on the other hand significantly stronger public
finances than Germany, and are not burdened with the uncertainty
in the eurozone.”

To contact the reporter on this story:
Johan Carlstrom in Stockholm at
jcarlstrom@bloomberg.net

To contact the editor responsible for this story:
Jonas Bergman at
jbergman@bloomberg.net